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European competition law newsletter – September 2015

Open to All; Small Business Obtains Interim Injunction to Restrain Alleged Abuse of Dominance

A self-described “small business” recently succeeded in obtaining an interim injunction (restraining an alleged abuse of dominance) in a UK court against the giant telecom provider Telefónica (trading in the UK under the name O2). This shows the continuing development of private competition law litigation in the UK (and EU generally), including outside the “follow-on” sphere, and its use even by SMEs.

The claimant in the case, Packet Media Limited (PML), provides telecommunication services and, in particular, services involving the sale or leasing of global system for mobile telecommunications (or GSM) Gateway equipment and the reselling of air time. This enables end customers to engage in single-user self-use of GSM Gateways. O2 is a mobile network operator (or MNO) in the UK.

On 5 June 2015, O2 sent a letter to PML's counsel in which it gave PML seven days' notice of the suspension of the services to the SIM cards (or subscriber identity module cards) that PML and its customers were using in gateways on the network and which O2 was aware of. The letter identified 2,045 SIM cards which O2 intended to disconnect. PML argued before the court that the action which O2 proposed to take would constitute an abuse of a dominant position contrary to the UK Competition Act 1988.

A GSM Gateway is not itself a phone but rather is installed as part of the user's switching equipment with the effect that when the user makes a call, or sends an SMS message, from a fixed phone line to a mobile phone number (known for short as "F2M traffic"), that call is diverted from the fixed line through the GSM Gateway connecting with the receiving mobile network via the air interface. The call or SMS then attracts a lower cost than if it had been made as a conventional fixed line communication to be terminated on a mobile network.

In considering the application for an injunction, the judge held that the relevant market is the wholesale provision of access to call and SMS text origination on mobile networks operating and serving customers within the UK market. PML's market is the retail provision of fixed-to-mobile calls and SMS text messages to end users.

The judge also found that there was an arguable case of alleged abuse of a dominant position in this market (call origination) and that the balance of convenience favoured the grant of interim relief so as to preserve the status quo pending trial.

Rare Excessive Pricing Case

On 6 August 2015, the UK Competition and Markets Authority (CMA) announced that it had sent a statement of objections (SO; preliminary statement of case) to Pfizer and Flynn Pharma alleging abuse of a dominant position under EU and UK competition law arising out of excessive and unfair pricing of a pharmaceutical product. This is therefore an unusual example of an EU regulator going after companies for excessive pricing.

Pfizer is the manufacturer of the drug in question (phenytoin sodium) and Flynn Pharma is a UK distributor. The SO concerns both the prices that Pfizer has charged to Flynn Pharma and the prices that Flynn Pharma has charged to its customers, since September 2012.

Prior to September 2012, Pfizer manufactured and sold phenytoin sodium capsules to UK wholesalers and pharmacies under the brand name Epanutin. Pfizer sold the UK distribution rights for Epanutin to Flynn Pharma, which de-branded (or genericised) the drug and started selling its version in September 2012. Pfizer continued to manufacture the drug, which it sold to Flynn at prices that were significantly higher than those at which it had previously sold Epanutin in the UK – between eight and 17 times Pfizer’s historic prices. Flynn then sold the drug on to customers at prices which were between 25 and 27 times higher than those historically charged by Pfizer.

Prior to September 2012, the UK National Health Service (NHS) spent approximately £2.3 million on phenytoin sodium capsules annually. This spend (paid to Flynn and other suppliers of phenytoin sodium capsules) was just over £50 million in 2013 and over £40 million in 2014.

The CMA commented that this price increase was “very high” and “led to a big increase in the NHS drug bill”. Assuming the parties are dominant, the issue is likely to be whether there was any justification for this, since on the face of it the September 2012 changes do seem likely to have produced excessive prices.

Although these types of cases are rare, it’s interesting to note that the European Commission (EC) is currently investigating Gazprom for excessive pricing under EU competition law. It has alleged (in an SO of 22 April 2015) that the company has been pursuing an unfair pricingpolicy in five EU Member States, charging prices to wholesalers that are significantly higher compared to Gazprom’s costs or to benchmark prices. These unfair prices allegedly result partly from Gazprom's price formulae that index gas prices in supply contracts to a basket of oil product prices and have unduly favoured Gazprom over its customers. The CMA will be applying similar principles and case law as are being used by the EC in the Gazprom investigation.

The Benefits of a Compliance Programme

As reported in our August 2015 European Competition Law Newsletter, a membership organisation of UK private consultant ophthalmologists, Consultant Eye Surgeons Partnership (CESP) Limited, has admitted breaching competition law and agreed to pay a fine. This was set at £500,000 but reduced to £382,500 since it co-operated with the CMA and also since it adopted a “comprehensive competition law compliance programme”.

CESP Limited gained a 10% reduction for adopting the compliance programme and a further 15% discount for co-operating and admitting the infringement.

CESP Limited has accepted liability for a number of infringements during the period September 2008 to present, which include the following:

Recommending that its members refuse to accept lower fees offered by an insurer, and that they charge insured patients higher self-pay fees.

Circulating amongst its members detailed price lists for ophthalmic procedures, such as cataract surgery, to be used with insurers. These collectively set prices did not pass on lower local costs (such as cheaper hospital fees) and made it harder for insurers and patients to obtain lower prices.

Facilitating the sharing of consultants’ future pricing and business intentions such as whether to sign up to a private hospital group’s package price, which enabled members to align their responses.

CESP Limited did not have a competition compliance programme and the CMA welcomed the adoption of one as a “positive step” which “[sets] a good example for other organisations in the medical professions”.

This reduction for adopting a compliance programme is in accordance with the CMA’s fining guidelines, which state:

“… the CMA will consider carefully whether evidence presented of an undertaking’s compliance activities in a particular case merits a discount from the penalty of up to 10 per cent. Thus, the mere existence of compliance activities will not be treated as a mitigating factor. However, in an individual case, evidence of adequate steps having been taken to achieve a clear and unambiguous commitment to competition law compliance throughout the organisation (from the top down) – together with appropriate steps relating to competition law risk identification, risk assessment, risk mitigation and review activities – will likely be treated as a mitigating factor. The business will need to demonstrate that the steps taken were appropriate to the size of the business concerned and its overall level of competition risk. It will also need to present evidence on the steps it took to review its compliance activities, and change them as appropriate, in light of the events that led to the investigation at hand …”.

This position remains very different from that still adopted by the EC, which it describes as:

“The mere existence of a compliance strategy will not be taken into consideration when setting the fine: the best reward for a good compliance strategy is not to infringe the law.”

Compensation Schemes for Breaches of Competition Law in the UK

On 14 August 2015, the CMA published guidance on a new power to encourage competition law-breaking businesses voluntarily to pay compensation to victims.

Under the guidance, businesses setting up voluntary redress schemes can, in certain circumstances, receive a discount of up to 20% of any penalty imposed by the CMA for a breach of competition law.

The guidance provides details on how businesses can apply to the CMA for approval of a scheme, how it will consider such applications, the procedural framework for determining levels of compensation, and how schemes should operate.

The schemes do not prevent affected consumers or businesses from taking action through the courts for damages if they prefer.

The new power is part of a wider set of changes under the UK Consumer Rights Act 2015 (CRA) intended to make it easier, quicker and less costly for those who have suffered from breaches of competition law to obtain redress (and to improve the UK’s position as a venue of choice for private competition law litigation in the EU). Other key changes include increasing the UK Competition Appeal Tribunal’s (CAT’s) role in competition private actions by, for example, introducing enhanced provisions on opt-out and opt-in collective actions in the CAT and providing for a fast-track procedure to enable simpler cases brought by small businesses to be resolved more quickly and at a lower cost.